U.S. Oil Passes The Torch...Two Hotspots Set To Profit!

A few weeks ago I told you about a shocking statistic coming from the U.S. oil patch.

Back then, I was rustling through domestic production data and realized Alaskan oil production, – once the provider of nearly 25% of U.S. oil supply – has fallen off a cliff.

Today, I have updated numbers. And as you’ll see, this profitable situation has only accelerated…

Back in mid-September when I first told you about this story, I was shocked to see that Alaskan production had fallen under 500,000 barrels per day and sat at 493,000bpd.

To put that number in dire perspective, back in the late 80’s Alaska was pumping out over 2 million barrels per day – accounting for over 24% of domestic production.

Today, with updated numbers from the U.S. Energy Information Administration (EIA), it’s clear that the situation has gotten even worse. Production data now show that Alaska’s oil output has fallen to a mere 415,000bpd, which represents a 78,000bpd drop in a month.

You see, while Alaskan oil production continues to recede, production from new unconventional oil sources has increased dramatically. It’s a passing of the torch. While this conventional oil source – what Byron King refers to as the “easy” oil – slowly declines, unconventional oil is starting to fill up U.S. pipelines.

This unconventional oil (also referred to as “tight” or “shale” oil) is creating massive profit opportunities right here in our own backyard. In fact, the Alaskan depletion is actually making these shale sources even more profitable, acting as a crutch for current prices.

Two Hotspots Set To Profit…

Right now there are two hotspots I’d urge you to focus on: North Dakota’s Bakken oil field and the Eagle Ford in southern Texas.

The reason these two deposits offer the most immediate profit opportunity is found in the same data set that alerted me to the Alaskan fall-off.

While Alaskan production has fallen more than 165,000bpd in the past 6 months, production for North Dakota is up 115,000bpd… and Texas output increased a whopping 161,000bpd.

The speed at which these two unconventional oil plays are bringing supply online is amazing – and with prices above $90 a barrel (thanks in part to Alaska’s shrinking supply) it’s also very profitable.

With breakeven costs (the cost it takes to get the oil out of the ground) for unconventional oil at a ballpark estimate of $50-60 per barrel, every day that the price of oil stays above $80, $90, $100, fast-moving producers in these energy hotspots are raking in extra cash.

That’s why domestic oil presents such an inherent opportunity for investors today. There’s nothing slowing down efficient companies. North Dakota and Texas are increasingly friendly to drilling. And oil prices have support.

But at the same time there are plenty of reasons why global oil prices could head even higher. The most immediate of which is the still-simmering Middle East.

For gasoline and oil users this is bad news. But for domestic oil producers – those operating in the Bakken and Eagle Ford especially – this price spike could lead to an immediate windfall.

That said, let’s recap a couple of my favorite companies in each hotspot…

Eagle Ford in Texas:

EOG Resources (EOG) — EOG is the largest crude oil producer when it comes to unconventional drilling in the U.S. – by a margin of 2-to-1 over their closest competitor. That means they have drills spinning and more production than anyone in the unconventional game. They’re also a huge player with great looking acreage in the Eagle Ford. With $90 oil EOG is just adding to its bottom line.

ConocoPhillips (COP) – Looking at a map of the profitable oil/gas window in the Eagle Ford, you can see that Conoco (along with EOG) has an impressive acreage position – with a majority of the production coming in the form of oil and liquids. Conoco is ramping up production with 16 rigs spinning – and looks likely to continue paying its 4.6% dividend. COP is looking big in Texas.

North Daokta’s Bakken:

Statoil (STO) – Statoil bought big in the Bakken with the 2011 acquisition of Brigham Exploration. It’s been less than a year since Statoil acquired this Bakken acreage and the company has already hit the ground running. The Bakken acreage was a timely purchase and is already streamlined and ready to profit. With Statoil’s logistical prowess and ability to market their Bakken oil I expect increasing production numbers and cash coming in the door. Statoil currently pays a 4% dividend, so that cash can find its way directly to your portfolio.

Oasis Petroleum – One of the few pure-plays in the Bakken is Oasis. The company has nine rigs turning in the Williston Basin’s Bakken and 84 operated wells. Looking at a quarterly chart of production the trend since Q1 2010 has been a steady rise in production with only one pullback in mid-2011 – a solid track record, indeed. Plus, Oasis trades at a fraction of the cost of some of the bigger Bakken players like Continental and Statoil. This undervalued player has a strong upside.

There should be no doubt about it, I like American unconventional oil plays. Until there’s reason to stop, I’d keep a close eye on these hotspot opportunities.

About Matt Insley:

Matt Insley is the managing editor of The Daily Edge and now the co-editor of Outstanding Investments. Matt is the Agora Financial in-house specialist on commodities and natural resources. He holds a degree from the University of Maryland with a double major in Business and Environmental Economics. Although always familiar with the financial markets, his main area of expertise stems from his background in the Agricultural and Natural Resources (AGNR) department. Over the past years he’s stayed well ahead of the curve with forward thinking ideas in both resource stocks and hard commodities. Insley’s commentary has been featured by MarketWatch.